The price of a litre of petrol is the combination of a number of factors - not simply the cost of the underlying oil.
Petrol and diesel are intrinsically linked to oil prices, which itself has been of particular note this year. High commodity prices are one of the drivers of the recent period of high inflation but consider also the cost of turning oil into petrol and transporting it around the world.
But in recent weeks, much attention has been on whether forecourt retailers, including supermarkets, have been fairly reflecting the wholesale cost of fuel and upping profit margins.
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On top of that comes biofuel additives, taxes and the retailer's profit margin.
The UK average for unleaded is currently around 143p per litre and 147p for diesel, down by around 7p since the Competition and Markets authority probed supermarket forecourts in May. But exactly what makes up the price of a litre of petrol and how do global events influence what you pay at the pump?
Here’s everything you need to know about fuel prices.
How the price of a litre of petrol is determined
Ultimately, the price of a litre of petrol is determined by oil prices as without oil, you can’t make petrol.
There are many different types of oil, some of which are easier to refine into petrol and diesel than others. The price of oil depends on different factors, including the strength of the pound.
You see oil products are generally traded on the global market in dollars, which means that if either the dollar strengthens or the pound weakens, oil becomes more expensive for consumers here in the UK.
This is one of the reasons why the price of a litre of petrol has jumped so much over the past year. The value of the pound has fallen against the dollar by around 10% over the past 12 months, making dollar imports 10% more expensive.
The weak pound was not the only factor that drove petrol prices higher in 2022. Russia's invasion of Ukraine sent oil prices skyrocketing in the first half of the year, although they moderated in the second half as fears of a global recession and subsequent drop in demand for hydrocarbon products took hold.
Yet sterling’s sharp depreciation prevented UK consumers from feeling the full impact of lower oil prices.
“The influence of the exchange rate is often overlooked when drivers compare oil price movements with those at the pump. At the moment, it is critical. Oil and fuel on commodity markets are traded in dollars, which makes the weaker pound very bad news for motorists,” AA’s fuel price spokesperson said.
Simon Williams, fuel spokesman for the RAC, said over the winter, drivers were “taken advantage of by retailers who rewrote their pump price strategy, costing motorists millions of pounds as a result.
“Their resistance to cutting prices and to only pass on a fraction of the savings they were making from lower wholesale costs is nothing short of scandalous.”
Petrol prices could continue falling
The good news for consumers is the fact that petrol prices could continue falling.
Oil prices have fallen to levels not seen since the end of 2021 in recent weeks. Meanwhile, the pound has strengthened by around 13% from its multi-decade low printed in late September after Lizz Truss’s disastrous mini-budget.
At the same time, retailers are finally starting to pass on some of the drop in wholesale costs to consumers, particularly after an intervention by the Competition and Markets Authority. It claimed the average supermarket margin on fuel in 2022 had increased compared to 2019.
RAC fuel spokesman Simon Williams says: “Significant cuts to the price of supermarket diesel were long overdue as its wholesale price has been below petrol’s since the end of March. As a result average retailer margin on diesel had reached 22p a litre – more than three times the long-term average of 7p.
The average price of supermarket diesel since the start of the year, has fallen by 27p, but diesel drivers are continuing to get a poor deal, the RAC say.
“For two straight months, it has cost retailers less to buy diesel on the wholesale market than it has petrol, yet they continue to charge more for diesel at the pumps. While wholesale price changes take some time to filter through to smaller forecourts which only buy new stock every few weeks, we can’t see any reason why the supermarkets still haven’t cut their prices to fairer levels as they buy much frequently,” Williams adds.
It’s not the only major move in fuel costs in recent months. Since December, the average cost of petrol across the country has been around 150p per litre, RAC data shows, roughly the same level it was before Russia's invasion of Ukraine.
As some sort of stability returns to global oil markets, and retailers curtail profit margins on the back of government pressure, the price of a litre of petrol could continue to decline.
What makes up the price of a litre of petrol?
The price that you pay at the pump for a litre of petrol is made up of six distinct components.
• Fuel duty
Fuel duty, or the tax that we pay for our fuel, is currently set at 52.95p a litre, represents roughly 35% of a litre of petrol.
• Wholesale costs
The cost of wholesale petrol to the supplier is the second biggest component – accounting for roughly 29% according to analysis by the RAC – and is based on the price of raw materials including crude oil and refining costs.
The price that we pay for our petrol at the pump largely moves in line with oil prices, and they can be very volatile.
On top of fuel duty, drivers also pay VAT at a rate of 20% on the petrol they buy. As a result, when the price of fuel increases, so too does the amount of VAT that you pay. It represents around 17% of the price of a litre of petrol.
• Retailer Profit
The amount retailers receive from the sale of every litre is around 13%, according to the RAC.
• Delivery and distribution
The cost of distributing and transporting the fuel is passed onto drivers and represents around 1% of the total cost.
• Biofuel content
Finally, there is the biofuel content. According to the RAC, the biofuel content accounts for around 5% of the price of a single litre of petrol today.
Rupert is the Deputy Digital Editor of MoneyWeek. He has been an active investor since leaving school and has always been fascinated by the world of business and investing.
His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert was a freelance financial journalist for 10 years before moving to MoneyWeek, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them.
He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.
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